It’s the annual Lump of Coal Awards, my holiday tradition of easing Santa’s burden by singling out the bad boys and girls of the fund industry who deserve a lousy lump of lignite in their Christmas stockings this year.
And the losers are:
• Wells Fargo, for a pricing mistake it hoped no one would notice. Fund prices are supposed to reflect the value of underlying securities, but there are plenty of times when issues are mispriced, typically by fractions of a penny. When it happens, errors are corrected, affected investors are made whole and it’s business as usual.
But Wells Fargo had to reset the net asset value for two international funds in September, and the stakes weren’t penny fragments; Wells Fargo Advantage International Value shares fell by more than 5 percent – and Wells Fargo Advantage Diversified International shares by more than 2 percent — the day the fix was made.
Wells Fargo said nothing; oh, it disclosed the pricing changes in a “product alert,” and set things right, but it never said what went wrong. That’s insulting to shareholders’ intelligence, which is why investors should wonder what else could go wrong that management wouldn’t feel the need to tell them about.
• Management at the Royce Funds, for a self-serving idea disguised as a good move for shareholders. Royce Value Trust (RVT) – a closed-end fund with a good track record – invited shareholders to a special stockholders’ meeting in September at which it asked them to “contribute a portion of the Value Trust’s assets to a newly organized, closed-end management company, Royce Global Value Trust.”
The requested $100 million “contribution” — 8 percent of RVT’s assets — was not a donation, of course; investors were simply being asked to move a chunk of their money from a domestic fund into one that only buys foreign stocks and can put one-third of its assets into emerging markets. This wasn’t about diversification, however. Royce needed $100 million to kick-start Global Value (RGT), keeping expenses low and meeting the listing qualifications for the New York Stock Exchange.
• Investors in Royce Value Trust, for approving the deal. We know that no one reads the paperwork they get from funds, but shareholders must stop saying yes to nonsensical arrangements that they don’t understand.
• The Tealeaf fund, the worst-named new fund of the year. It’s too early to tell whether Tealeaf Long/Short Deep Value (LEFAX) will overcome a high expense ratio and mature into a good fund, but it’s too late to take the nascent issue seriously based on its name. Anyone who blows it when they name the firm doesn’t inspire confidence in what happens next.
• Morningstar, for forgetting that the mettle of a fund is what earns its medals. Morningstar introduced analysts ratings in 2011, going beyond its traditional star system to have analysts come out and say which funds are truly worth owning, based on the Olympic winners scale of gold, silver and bronze. There’s no denying that the analyst ratings are a significant upgrade and help to investors – a kind of “Good Housekeeping Seal of Approval” — but anyone who watched Olympic contests before the fall of the Soviet Union knows that there are winners who show their stuff in competition, and then “winners” decided by the outrageousness of the judges. There are plenty of questionable medalists in Morningstar’s ratings, but none more than Royce Low-Priced Stock (RYPLX). There’s no denying the fund’s problems — Morningstar’s own data shows that the fund has consistently delivered below-average returns with above-average risks, excessive costs and a bloated pool of assets — but the comrades judging the fund competition still gave the fund a silver medal.
• New Path Tactical Allocation Fund for not knowing the “new path” it’s taking. In late February, this small fund (GTAAX) – which opened in 2011 – announced in a prospectus supplement that “During the period from February 28, 2013 to April 29, 2013, the investment objective of the Fund will be to seek capital appreciation and income.” That was confusing because that was already the fund’s objective. The document explained, however, that the prospectus required a 60-day notice of changes to the fund’s investment objective; thus, when the prescribed 60 days ended on April 30, the fund would “seek total return.” Indeed, the fund’s prospectus thereafter reflects the change. Alas, the fund’s own website doesn’t.
• Those behind Equinox Commodity Strategy fund, for apparently misreading both the market and the solar calendar. In the year leading up to the opening of this fund in 2011, the average commodity fund was up nearly 30 percent. Thus, the fund came late to the party in its asset class, and while it managed not to do as poorly as the average fund in the group — an annualized loss of roughly 5.4 percent compared to a 6.25 percent decline during its short lifespan — management pulled the plug this summer. Then they scheduled the final liquidation for Sept. 27, five days late for the autumnal equinox, the event the fund was named for.
• Deutsche Bank, for where they put Germany on the map. When MSCI Canada Hedged Equity couldn’t gather more than $5 million in assets, Deutsche didn’t simply pull the plug, it overhauled the ETF into MSCI Germany Hedged Equity (DBGR), either on the assumption that investors in the Canada fund meant to invest in a different country on a different continent, or that they wouldn’t notice the difference.
• YieldShares High Income ETF, for its oily beginnings. Another case of a new fund created over the corpse of an existing one, investors in the Sustainable North American Oil Sands ETF learned in June that their fund had become YieldShares High Income (YYY). Maybe the managers came up with this at a drunken game of word association, but a change this big should have brought a sober reflection that investors deserved a fresh start.Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@MarketWatch.com or at P.O. Box 70, Cohasset, MA 02025-0070.